How earnings yield works

The price to earnings ratio is price over EPS. Earnings yield is EPS over price, which is one over that multiple:

$$\text{earnings yield} = \frac{\text{EPS}}{P} = \frac{1}{\text{P/E}}$$

On a $50 share with $2.50 of earnings, P/E is 20. Yield is $2.50 / 50 = 0.05$, 5 percent. The same 5 percent is $1 / 20$. With 100,000,000 shares outstanding, market capitalisation is $5,000,000,000 and total earnings are $250,000,000. Earnings over market cap is 5 percent again, because multiplying both sides by the share count cancels.

That 5 percent is not a cash coupon. It is the earnings rate implied by the multiple if this year's profit stayed where it is. A dividend is cash the firm actually sends. Plenty of firms print a 5 percent earnings yield and pay none of it out.

The price to earnings calculator on this page is both routes: price over EPS, and market cap over total earnings. How the P/E ratio works owns the multiple. How earnings per share works owns the dollar in the denominator. This page owns the reciprocal.

Keep the $50 price and 100,000,000 shares. Raise EPS to $5.00. P/E falls to 10. Yield rises to 10 percent. Market cap is still $5,000,000,000. Total earnings are now $500,000,000.

The price did not move. The denominator did. A higher yield here is a more profitable year, not a fatter cheque. Sorting a list by P/E low to high is the same order as sorting by earnings yield high to low. A 10 times stock yields 10 percent. A 20 times stock yields 5 percent. Neither ranking is a bargain screen on its own: a distressed name can print a huge yield because the price collapsed faster than trailing EPS.

The P/E explorer holds the price still and lets you drag EPS. As the multiple falls, the yield rises, because they are one identity.

Price is now $80, EPS still $2.50, shares 50,000,000. P/E is 32. Yield is $2.50 / 80 = 0.03125$, 3.125 percent. Market cap is $4,000,000,000. Total earnings are $125,000,000.

The ratio is higher than 20 and the firm is smaller than the first sheet. A 3.125 percent yield on a $4,000,000,000 firm is a different object from a 5 percent yield on a $5,000,000,000 firm. Yield hides scale the same way P/E does. Put the share count back in before lining two names up.

Trailing against forward P/E is the year in the denominator. Trailing yield uses last year's EPS. Forward yield uses next year's. Mixing them in a table is how one firm looks like two.

It is not the required return. If earnings stay flat and you paid 20 times, you own a 5 percent earnings stream on today's price. If earnings grow, the yield on today's price rises after the fact. If they fall, it shrinks. The Gordon growth model is the version that splits a required return into a yield plus a growth rate. Earnings yield is only the first piece, and only if you treat this year's EPS as next year's.

It is not free cash flow yield. Earnings are an accounting profit. Free cash flow takes capex and working capital off. A firm can print a 5 percent earnings yield and still consume cash.

It is not EV/EBITDA flipped. Enterprise value over EBITDA is a different claim: debt sits in the numerator and the denominator is before interest. Do not line a 5 percent earnings yield up next to an EV/EBITDA of 13 and call the gap a finding.

When earnings are zero or negative the P/E ratio stops working, and so does the yield as a useful multiple. Dividing a price by a loss does not produce a cash rate anyone can spend. This calculator prints no P/E in that case rather than a nonsense figure. EPS itself can still be written as a loss per share. That is a description of the year. It is not a yield.

Loss-making firms get compared on revenue, or on a different multiple, not here. Type the EPS your sheet is using. Trailing and forward are not interchangeable.

It is not a dividend screen, not a bargain ranking, and not a trailing-against-forward switch. The three sheets are a $50 share on $2.50 of EPS (P/E 20, yield 5 percent, earnings $250,000,000), the same price on $5.00 of EPS (P/E 10, yield 10 percent, earnings $500,000,000), and an $80 share on 50,000,000 shares (P/E 32, yield 3.125 percent, earnings $125,000,000). This is educational material, not financial advice.